Mutual Daily Mutterings
Quote of the day…
“My horse was so late getting home, he tiptoed into the stable”.…Henny Youngman
Chart du jour…market pricing of the RBA’s first rate hike (vs a week ago)…
Overview…”RBA in the spotlight…”
- A modestly positive end to the week in offshore markets with US and European stocks closing in positive territory, both on the day, over the week, and month. The S&P 500 closed at yet another all-time record high on Friday and reported its best month in almost a year. Meanwhile the local market fell out of the ugly tree and hit every branch on the way down across the day, week and month. Credit generally held its ground on the day, although the US financials widening looks to have picked up some widening momentum, +3 bps on Friday, +5 bps on the week, and +7 bps over the month. Elsewhere spreads are drifting wider.
- In bonds, yep more pain and suffering for local long bond holders with markets hit repeatedly by the ugly stick – a +24 bps rise in yields with the 10’s breaking through 2.0%, a level not seen since before the pandemic. US treasuries caught a bid later in the session on Friday despite US data prints coming out either inline or stronger than expected. Of note was the employment cost index which printed its strongest quarterly increase on record. Month-end buying may have provided some support.
- Some words of wisdom from the ‘Fonz’, aka Elisa Haddad, aka former colleague, aka the coolest Lebanese-Canadian running around “the risk that major central banks normalise policy too far, too fast is weighing on financial market sentiment. However, we would fade that risk as major central banks have an incentive to fall behind the inflation curve and avoid a sharper slowdown in economic activity. This means real yields are expected to remain deeply negative for some time and supportive of risk assets.”
- The main event for local markets is the Melbourne Cup tomorrow, which will be preceded by the RBA’s policy meeting (at 2:30pm). Any tips for the nags welcome.
- Community service announcement…there was no morning mutterings on Friday. I worked from home and the big winds we had on Thursday night knocked out my internet.
- Offshore Stocks – modest gains across offshore markets on Friday, with the S&P 500 closing at new record highs. The rally on the day wasn’t exactly convincing with 58% of stocks in the index closing in the red, with only four out of eleven key sectors gaining ground. Healthcare (+1.0%), followed by Telcos (+0.8%) and Tech (+0.4%), while at the other end of the gene pool we had REITS (-1.2%), Energy (-0.7%) and Utilities (-0.6%). US reporting season has passed the half way mark with aggregate sales up +17.7% and earnings up +38.9% on the prior corresponding period. Against consensus expectations, sales have beaten by +2.0% and earnings by +10.0%. The next impact so far from all the outlook statements etc has seen the street revise forward earnings up by +4.2% (over the reporting period), which has forward PE’s at 21.9x vs pre-pandemic averages of 17.7x. Any ‘normalising’ in PE’s would see a ~15% correction.
- Local stocks – all the fun and frolic in bond markets finally took its toll on stocks, with a meaningful -1.4% down day on Friday, resulting in a monthly loss of -0.1%, the second consecutive monthly loss YTD. Not one sector was able to gain ground, while 80% of stocks in the ASX 200 closed in the red. The worst of the worst was REITS (-2.5%), no surprises there…rising bond yields implies falling capital values, which flows through to downward earnings adjustments. Telcos (-1.9%) were next in line for six-of -the-best from the headmaster, followed sheepishly by Financials (-1.8%). Doing their darnedest to keep their noses above the muck, but failing miserably, was Healthcare (-0.1%), and then Materials (-0.9%) and Industrials (-1.1%). In the end the ASX 200 dipped bellow its 50 day and 100 day moving average. Valuations are still on the frothy side vs pre-pandemic averages, forward PE’s are at 18.1x vs 16.1x, while forward earnings have been revised down -6.0% since the middle of August. If PE’s normalise to pre-pandemic averages, we’re looking at a ~10% correction. Despite the modest leads from offshore, ASX 200 futures are up +0.9%.
- Local Credit – from the mouths of traders…”another wild day… rates markets once again the focus after some seismic moves post the RBA’s no YCC decision. Flow was limited to month end index extensions and opportunistic outright buyers. Liquidity was extremely thin with close to zero prices in the interbank market all day and no risk changing hands. Very difficult to have a clear grasp on spreads at this point in time”. No change in major bank senior paper on the day, while on the week spreads were +1 – 3 bps wider. Much of this widening reflects changing technical conditions, namely expected increased supply and moderating demand dynamics (CLF phasing out). We should get further colour on the outlook for supply with WBC’s results this morning. ANZ last week suggested that they may have modest senior debt funding requirements in FY22 given a meaningful funding gap shrinkage, from $100bn to $39bn. And for ANZ, their loan growth over recent months lagged system considerably, which reduces likely wholesale funding needs further. Having said that, with the economy strengthening and fiscal transfers decreasing, deposit growth should slow and support senior issuance. My feel is senior spreads have another +5 – 10 bps of widening to go before settling into a new equilibrium. In the tier 2 space, some scattered buying reported on Friday, but it wasn’t enough to prevent some modest widening with spread a basis point wider on the day. The 2026 calls are now around +134 – 138 bps, the 2025’s are at +126 – 129 bps (MQG at +143 bps) and the 2024’s are at +101 bps.
- Bonds & Rates – another day of pain and suffering for anyone long fixed bonds on Friday, no part of the curve was spared the rod as markets snubbed their noses at the RBA with absolute contempt. Two-year yields felt most pain on the week, rising +66 bps to 0.835%, while three-year yields, the Nov-24’s rose +49 bps to +1.24%. Keeping in mind, ‘officially’ the Nov-24 is still subject to the RBA’s yield curve control activities, yet the RBA did not step in and provide support. Given their absence in the face of such aggressive moves, it’s hard to see the RBA sticking with its YCC strategy, the genie is well and truly out of the bottle and the toothpaste out of the tube, both very hard to get back into their respective receptacle. Offshore saw modest moves on Friday night, with a very modest rally in US ten-year yields (-3 bps). Consequently, Aussie futures retraced some of the moves recorded last week with the ten-year future closing up +16.5 bps in price on Friday night while the three-year closed up +8 bps. Friday night’s retracement aside, tomorrow’s RBA policy meeting will be watch with as much interest as the race that stops the nation. Two key questions for me are, what does the RBA do with it’s YCC strategy (my call is they wave the white flag on that one), and do they adjust their view on the timing of the first likely rate hike? If they scrap their YCC activities, then they have to concede rate hikes are likely sooner than 2024, their current signalling. Markets are pricing in 2H next year (see Chart du jour), and serval prominent rate strategists have brought forward their rate hike expectations to 2023.
- Beyond the RBA meeting tomorrow, the FOMC meets on Thursday our time with the Fed expected to formally announce tapering details. From CBA FX gurus…”FOMC announces it will taper its monthly asset purchases by $US20bn/mth compared to expectations of $US15bn/mth (Thursday Sydney time). The FOMC is behind the curve in our view. US inflation in consumer prices and wages have materially stepped up. FOMC Chair Powell is likely to be more hawkish on inflation at his press conference”
- A snippet from Bill Fleckenstein, a guy who knows some stuff, from last week on the state of STIR’s…”there’s been quite a good deal of volatility in the short-term interest rate (STIR) market, including some unusual action in Canada, and Australia through the week. To quote the Lord of the Dark Matter, “The recalibration in global STIR markets is as powerful as anything I can recall.” Regretfully, no one really has a handle on exactly how much of this is a change in expectations or mechanical cross-currency carry trades being blown up, let alone exactly what it means. But it’s a development that we have to keep an eye on, and it could easily be the very early indication of fixed income markets revolting against what the central banks have in mind. A trend change has to start somewhere, and a 40-year bond bull market has given people way too much confidence in the ability of the central bankers. If that is starting to fray, this could easily be an early indication that, although I’m not saying that’s the case at the moment. I don’t mean to imply the central bankers will get aggressive versus inflation, because they won’t, but as they get discredited, it will have lots of serious ramifications. I don’t want to get too far ahead of events just now, but this is one of the first signs of potential trouble that we’ve seen, particularly since the short end of the market is the easiest for them to anchor”.
- Local Macro – some reasonably buoyant data prints on Friday (tabled below). Paraphrasing some commentary from CBA: Retail Trade – continued to trend higher in the states not experiencing lockdowns. And there was a small bounce in retail trade in NSW in the month ahead of the reopening in October. Retail trade fell again in Victoria (-2.1%). By category there were strong increase in spending in clothing & footwear (+5.9%), eating out (+5.0%), household goods (+4.3%) and other retailing (+2.1%). Spending on food (-1.4%) and department stores (-0.3%) was lower in the month. Private Sector Credit – the trends underway in recent months continued in September. That is, housing credit posted a solid increase, business credit expanded and personal credit fell. Over the year credit to owner occupiers has lifted by +8.7%. Credit to investors expanded by +0.3% in September to be +2.4% higher over the year. Producer Prices – the ABS producer price release provides a different measure of inflation in the economy – though it is CPI inflation that usually gets the most attention. The producer price final demand index measures prices received by domestic producers for goods and services that won’t be exported. This release also includes measures of input prices for some sectors.
- Offshore Macro – ripping off some commentary from NAB here, from Friday’s data releases….”the US core PCE deflator rose +0.2% MoM in September, in line with expectations taking the YoY reading to +3.3%, the lowest since March. This is a small reprieve ahead what is expected to be a new wave of price pressures, with used cars, hotel rooms and airline tickets prices all seen rising over the last few months of the year. Meanwhile the US employment costs index jumped by +1.3%, well above the consensus, +0.9%. This was the biggest quarterly rise in 31 years driven by the biggest surge in wages since Q3 1982, up +1.5%. If labour supply does indeed rebounds in Q4, following the end of generous unemployment benefits, the return of schools and the decline in US Covid-19 cases, then wage pressures should ease, but if they don’t then the tightening in the US labour market will be judged as more permanent and it will likely force the Fed’s hand into hiking sometime next year.”
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Scott Rundell, Chief Investment Officer
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